May Policy Decision

Bank Negara Malaysia (BNM), in a surprise move, decided to increase the Overnight Policy Rate (OPR) by 25 basis points to 2.00%, which also marks the end of twenty-two straight months of policy accommodation by the central bank. The move was driven, among others, by improving growth prospects thanks to sustained recovery in domestic demand and external conditions. The labour market is also recovering well, reflected in a steady drop in unemployment level, an increase in labour force participation and income prospects. The economy is also set to be sustained by massive fiscal spending last year (i.e., RM530bn COVID-19 fiscal stimulus expenditure through PRIHATIN, PRIHATIN+, PENJANA, KITA PRIHATIN, PERMAI, PEMERKASA, PEMERKASA+, PEMULIH), a favourable prospect that has been partly reflected in 4Q GDP momentum (4Q21 GDP: +3.6%; 3Q21: -3.4%). Output will also get a lift from expansionary Fiscal Budgets 2021 and 2022, with double digit YoY increases for the Development Expenditure (DE).

Growth momentum will also be spurred by various pro-consumption measures such as the 2% reduction in Employee Provident Fund (EPF) employee contribution (until June) and various financial assistance for the vulnerable groups (Bantuan Keluarga Malaysia – BKM, My50 unlimited Travel Pass, Early School Assistance, discount for PTPTN repayment). This will also be aided by a vibrant employment market following various initiatives that will underpin massive job creation (1mn, SOCSO’s JaminKerja, GLCs and GLiCs initiatives) which will push unemployment rate lower (2022F unemployment: +4.0%). Output will also be driven by a final and special EPF withdrawal in April where RM40bn have been approved for this purpose.

Malaysia’s growth trajectory is set to recover further, evidenced by the steady turnaround in high frequency indicators (i.e., CPI, IPI, trade), encouraging prospects that are expected to take hold in the near term. This will be further pushed by favourable external conditions thanks to full economic openings around the world especially in major economies (US, Eurozone, ASEAN). This, along with a lag impact of expansionary global fiscal strategy in 2021 and accommodative policy stance (until 1H22) will push demand for our key export especially manufacturing, mining and agriculture goods.

Output will also get a lift from the resolve to allow the rehiring of foreign workers (April onwards) which will address labour shortages issue facing key sectors such as manufacturing and agriculture. This will be further spurred by the strategic decision to open the international borders (from April) - a huge boost for services sector (i.e., tourism, accommodation, leisure, retail). A combination of these factors will push economic activity to rebound sharply in 2022 (+6.1%; 2021: +3.1%).

Risks to growth may however come from COVID-19 outbreak incidences which may lead to pockets of containment measures. Supply chain disruptions given raw material shortages (e.g., chips) could also affect our prospects. The prolonged Russia-Ukraine conflict could also bite given the disruption in global commodity markets and therefore, downside risks to global growth. Strict China COVID-19 lockdown policies is also a worry as it may dampen the full turnaround of manufacturing and trade sectors. All these could weigh on growth potential.

Policy Outlook: Cautious Prospects

Economic momentum is set to gain more traction in 2022 following a lag impact of expansionary fiscal and monetary strategies. This will also be aided by full economic openings given our move into the endemic stage in April. This positive development could underpin a nascent recovery in contact sensitive service-related sectors like airlines, land transport, hotels & restaurants, entertainment & theme parks, medical tourism and travel agents, a much-needed lifeline for these sub-sectors which have been affected by the COVID-19 pandemic. Economic activity will also be pushed by sustained output generation by manufacturing, mining and agriculture thanks to full economic openings in key regions, improvements in global pandemic conditions and rapid structural adjustment in global telecommunication sector. Economic momentum will also be driven by favourable external conditions thanks to vaccine-powered recoveries around the world. Other growth drivers may come from various initiatives including rapid job creation and the reopening of international borders beginning April. All these could be a precursor for further withdrawal of policy accommodation in the 2H. We anticipate another rate hike toward the later part of the year as BNM continues to find the balance between accommodating domestic growth and addressing the potential prospects of imported inflation and capital outflows.

Source: PublicInvest Research - 12 May 2022